WASHINGTON — Disappearing jobs, burrowing consumers and skittish companies are reasons for the Federal Reserve to ratchet down interest rates and brace the tottering economy.
Fed Chairman Ben Bernanke and his colleagues opened a two-day meeting Tuesday afternoon — their last before the November elections — to make a fresh assessment of economic and financial conditions and decide their next move on rates. Their decision — widely expected to be a rate reduction, the second in two weeks — will be announced today.
Betting on a hefty rate cut, Wall Street staged an energetic rally Tuesday. The Dow Jones industrials zoomed 889.35 points, their second- largest point gain ever.
Investors and many economists are predicting the Fed will slash its key rate by a half percentage point to 1 percent. A few think the Fed will opt for a quarter-point reduction to 1.25 percent.
“I’m torn,” Stuart Hoffman, chief economist at PNC Financial Services Group, said about the size of the cut. “Clearly, the economic outlook has weakened.”
Whatever the size of the rate cut, commercial banks’ prime lending rate for millions of consumer loans would drop by a corresponding amount. The prime rate is now at 4.5 percent and is used to peg home-equity loans, certain credit cards and other floating-rate loans.
Under either scenario — a half-percentage-point or a quarter-point cut — both the Fed’s key rate and the prime rate would fall to their lowest level in more than four years.
In grim news, consumer confidence plunged to its lowest level on record. The Conference Board reported Tuesday that its index dropped to 38 in October from 61.4 in September. That bunker mentality makes it more likely shoppers will retrench even more, throwing the economy into a tailspin.
Underscoring one of the big stresses Americans are under: The value of homes — people’s biggest asset — dropped by record amounts.
The Standard & Poor’s/ Case-Shiller 20-city housing index released Tuesday showed a drop of 16.6 percent in August from a year ago, the largest on record going back to 2000. The smaller 10-city index fell 17.7 percent, the biggest decline in its 21-year history.
Home prices in Denver are down 5.1 percent over the past year, the fourth-best showing among metro areas.
The Fed hopes that lower borrowing costs will entice people and businesses to spend again, which would help revive the economy. The Fed also hopes that other actions to shore up the U.S. financial system — along with lower rates — will help get credit flowing more freely again. So far, though, the central bank’s steps haven’t been able to turn around a panicky mind-set.
The Europeans also are weighing another rate cut.
“There is ample justification for pessimism,” said John Lipsky, first deputy managing director of the International Monetary Fund, the world’s financial firefighter. “Global prospects remain highly uncertain, and risks of a global recession loom large.”
Softening the blow?
Chairman Ben Bernanke, left, and the Federal Reserve are expected to deliver an interest-rate reduction today amid discouraging economic news:
38 — Consumer-confidence index, lowest on record and down from 61.4 in September
16.6% — Decline in the S&P/ Case-Shiller home-values index in August from a year ago
